Prejudice in the Workplace and Firm Revenue

Stakeholder Value

At the Gupta Governance Institute’s 15th Annual Corporate Governance Conference held on April 8, 2022, Isaac Hacamo from Indiana University demonstrated that when a job-search website reports one incident of racial prejudice in a firm, foot- traffic drops by 3 to 4 percentage points in all of the firm’s stores located in the same city where the incident occurred.

Key Insights

• Using original datasets on prospective employees and consumers from Indeed.com and Safeguard, this research finds that an incident of workplace racial prejudice posted on a job-search website can reduce store foot-traffic by a minimum of 2.8 and a maximum of 3.6 percentage points depending on the model specification. The effect on foot traffic is almost twice a large in states where the level of pre-existing racial prejudice is high.
• Using a randomized survey experiment, the research finds that awareness of a very negative non-racial review has no impact on consumer behavior. However, awareness of a racial prejudice review increases the likelihood of a consumer boycotting the firm by 7.5 percentage points and decreases the likelihood of a job seeker applying for a job at the firm by percentage points.
• The study indirectly highlights the value of good stakeholder governance. Specifically, it suggests that online job-search platforms can play a useful role in disseminating valuable information among prospective employees, and can provide a potential disciplining mechanism for firms.

Summary of Complete Findings

Firms are surrounded by a complex network of interested groups, which have multiple and sometimes conflicting stakes in a company. When making decisions, management can add value to a firm by taking into consideration the interests and perspectives of its stakeholders.

Prospective employees and consumers are critical groups of stakeholders because they can change their labor offer and/or their consumption of products if they are uncomfortable with a firm’s practices. This study shows that reporting one incident of workplace racial prejudice on a popular job-search website reduces store foot-traffic at all stores in the city where the incident happened.

Beyond lawsuits and cases covered in the news, data on episodes of racial prejudice in the workplace are scarce and incidents are likely to be underreported. In 2012, the popular job-search website Indeed.com introduced an employer review system. Each anonymous review contains textual comments, ratings on several aspects of a company, a date, and some information about the reviewers, such as their occupation, location, and employment status.

The researcher collected all reviews (7 million) for the 6,000 largest US firms with a storefront, including McDonald’s, Walmart, Home Depot, Chase, Bank of America, Marriott Hotel, AT&T, BP, AutoZone, and Walgreens. Over 20% of these employer reviews were negative. The negative reviews were sifted to identify approximately 10,000 episodes of racial prejudice in the workplace between 2012 and 2021.

The study shows that incidents of workplace prejudice per capita are more frequent in locations where a larger proportion of the population would not vote for a Black President or would be supportive of laws against interracial marriage. They are also more frequent in locations where there is a larger wage gap between black and white workers.

To determine whether there is a relationship between firm performance and workplace incidents of racial prejudice, the study uses foot-traffic data provided by Safegraph, which are based on information on the GPS location of 18 million anonymized mobile phones for each store in the US.

The study tests two specifications of the underlying model and finds consistent results. The first approach shows that firms experience a reduction of 3.1 to 3.5 percentage points in monthly visitors in all establishments in a city where a workplace prejudice review is published. The second approach shows a reduction of 2.8 to 3.6 percentage points in monthly visitors in all establishments in a city where a workplace prejudice review is published.

After prospective employees learn about workplace prejudice incidents, the effect on foot-traffic is almost twice as large in states where the expected level of racial prejudice is high. The level of prejudice by state is determined by the proportion of yes-answers to two questions from the General Social Survey: (a) whether survey participants would not vote for a Black President; and (b) whether participants would support a law against interracial marriage.

The study goes further to test the impact of racial incidents on firm performance by undertaking a randomized survey experiment. In the experiment, a sample of individuals were shown two positive reviews from Indeed.com, and a third review randomly picked between (i) a review associated with an episode of racial prejudice, (ii) a non-racial but very negative review, or (iii) another positive review about the company. The participants were then asked whether they were interested in submitting a job application, and whether they would change their consumer behavior and boycott the firm.

The results of the experiment add the following insights. Awareness of a very negative non-racial review has no impact on consumer behavior, but awareness of a racial prejudice review increases the likelihood of a consumer boycotting the firm by 7.5 percentage points. This effect is larger for non-whites and females. Furthermore, a racial prejudice review decreases the likelihood that a job seeker applies for a job at the firm by 12 percentage points. Lastly, a negative non-racial review leads to a decline of 6 percentage points in job applications.

In conclusion, this study uses original sources of data to show that good stakeholder governance matters, as firms without a strict protocol to prevent incidents of racial prejudice in the workplace may lose customers, as well as potential job applicants. The findings suggest that job-search websites could provide a monitoring and disciplining mechanism for firms.

“Prejudice in the Workplace and Firm Revenue” by Isaac Hacamo (Indiana University), March 2022.
Access the paper
Access working paper